Johnson Corp is interested in purchasing some newmaterial-handling equipment right after the beginning of the newyear. They would like to finance the new equipment with cash andmarketable securities, but if necessary they can get a short-termloan from a local bank. You have been engaged to prepare a masterbudget for Johnson Corp for the first quarter of 20x1. Johnson Corpis a small, rapidly growing wholesaler of consumer electronicproducts. The companyâs main product lines are small kitchenappliances and power tools. The marketing manager has recentlycompleted a sales forecast. She believes the companyâs sales duringthe first quarter of 20x1 will increase by 10 percent each monthover the previous monthâs sales. Then sales are expected to remainconstant for several months. Johnson Corpâs projected balance sheetas of December 31, 20x0 is as follows:
Cash: $ 70,000
Accounts receivable: 476,000
Marketable securities: 30,000
Inventory: 269,500
Buildings and equipment (net of accumulated depreciation):1,252,000
Total assets: $ 2,097,500
Accounts payable: $ 308,700
Bond interest payable: 25,000
Property taxes payable: 7,600
Bonds payable (10%; due in 20x6): 600,000
Common stock: 1,000,000
Retained earnings: 156,200
Total liabilities and stockholders' equity: $ 2,097,500
The controller is now preparing a budget for the first quarterof 20x1. In the process, the following information has beenaccumulated:
1) Projected sales for December 20x0 are $700,000. Credit salesare typically 80% of totals sales. Johnson Corpâs credit experienceindicates that 15% of credit sales are collected during the monthof sale, and the remainder are collected during the followingmonth.
2) Johnson Corpâs cost of goods sold generally runs at 70% ofsales. Inventory is purchased on account and 40% of each monthâspurchases are paid during the month of purchase. The remainder ispaid during the following month. In order to have adequate stocksof inventory on hand, the company attempts to have inventory onhand at the end of each month equal to half of the next monthâsprojected cost of goods sold.
3) The controller has estimated that Johnson Corpâs othermonthly expenses will be as follows: Sales salaries $ 40,000Advertising and promotion 35,000 Administrative salaries 37,000Depreciation 45,000 Interest on bonds 5,000 Property taxes 1,900 Inaddition, sales commissions run at the rate of 2 percent ofsales.
4) The company president has indicated that the company shouldinvest $225,000 in an automated inventory-handling system tocontrol the movement of inventory in the companyâs warehouse justafter the new year begins. This equipment purchase will be financedprimarily from the companyâs cash and marketable securities.However, the president believes the company needs to keep a minimumcash balance of $50,000. If necessary, the remainder of theequipment purchases will be financed using short-term credit from alocal bank. The minimum period for such a loan is three months. Thecurrent short-term interest rates are 10 percent per year and areexpected to remain at this rate through the time the equipment ispurchased. If a loan is necessary, the president has decided thatit should be paid off by the end of the first quarter if possible.If the entire loan cannot be paid off, the maximum amount should bepaid while maintaining the minimum cash balance.
5) Johnson Corpâs board of directors has indicated an intentionto declare and pay dividends of $100,000 on the last day of eachquarter.
6) The interest on any short-term borrowing will be paid whenthe loan is repaid. Interest on Johnson Corpâs bonds is paidsemiannually on January 31 and July 31 for the preceding sixmonthperiod.
7) Property taxes are paid semiannually on February 28 andAugust 31 for the preceding six-month period.
Required: Prepare Johnson Corpâs master budget for the firstquarter of 20x1 by completing the following schedules andstatements.
5) Complete the first three lines of the summary budget.Then do the analysis of short-termfinancing needs in requirement (6). Then finish requirement(5).
Summary cash budget:
20x1
January February March 1stQuarter
Cash receipts (sch 2)
Less: Cash disbursements (sch 4) Change in cashbalance during period due to operations
Sale of marketable securities(1/2/x1)
Proceeds from bank loan(1/2/x1)
Purchase of equipment
Repayment of bank loan(3/31/x1)
Interest on bank loan
Payment of dividends
Change in cash balance duringfirst quarter XXXXX XXXXX XXXXX
Cash balance, 1/1/x1 XXXXX XXXXXXXXXX
Cash balance, 3/31/x1 XXXXX XXXXXXXXXX